S&P Drops Controversial Part of Ratings Plan for Insurers

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Ratings firm got warning letter from Justice Department about antitrust issues

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S&P’s about-face, announced Monday, follows a comment letter submitted by the antitrust division of the US Justice Department. The letter cautioned that the proposed changes might warrant scrutiny by the division to determine whether there were violations of federal antitrust law.

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S&P said in a news release that it is considering alternatives for the withdrawn elements of its proposal, and would seek public comment on those. It said the Justice Department letter “will be carefully reviewed and considered” but declined additional comment.

The proposed changes are wide-ranging and complex. Some of the harshest criticism centered on a new way for S&P to size up risk in life insurers’ investment portfolios. S&P would have notched down, and sometimes entirely set aside, credit ratings from other firms on holdings in these portfolios. It would have treated some securities as junk even if a competitor rated them as investment-grade.

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In general, S&P would have given more favorable treatment to securities rated by Moody’s Investors Service and Fitch Ratings, on the basis that it has more data on their ratings approach than it does for DBRS Morningstar, Egan-Jones Ratings Co. and Kroll Bond Rating Agency LLC.

In an April 29 letter to S&P, the federal Antitrust Division expressed concern that the proposed changes might reduce insurers’ incentives to use credit-rating firms other than S&P, or invest in assets rated by agencies other than S&P.

The letter said S&P’s proposal “has the potential to raise barriers to entry and expansion by competitors, insulate S&P from competition, or otherwise suppress competition from rival rating agencies.” The move could get scrutinized by the Justice Department, the letter warned.

S&P’s assessment of the quality of an insurer’s investment portfolio is part of its overall analysis of an insurer, feeding into its view of the broader soundness of the carrier.

In its news release, S&P Global Ratings noted that it twice extended its response deadline to get a wide point of view. “Given the nature of some of the concerns raised in comments that we have received, we have decided to withdraw the proposed approach for determining the rating inputs of bonds and loans,” among other items, it said.

“After we have had sufficient time to consider the high number of comments received, we intend to issue” another request for comments, incorporating any proposed alternatives for the withdrawn elements along with potential other changes to what was originally proposed.

Write to Leslie Scism at [email protected]


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